Installment Loan Uses
The reasons why someone might use an installment loan vary widely based on the financial needs of the borrower.
They are used to pay for things like urgent medical bills, auto repairs, last-minute travel to see sick family members, tickets to once-in-a-lifetime concerts, or any other type of expense that is urgent or necessary. Life happens sometimes and if you don’t have an emergency fund to absorb the costs, then you often resort to things like loans or credit cards.
People who typically use installment loans might do so if they don’t have access to another type of loan with lower interest rates or a credit card. They need money quickly, but the fact that they have bad credit or that they don’t have a credit file means that they’re unlikely to qualify for another type of loan.
Borrowers also might want to take out a loan in order to build or rehabilitate their credit and cannot qualify for a credit card or loan. Since installment loans lenders consider criteria other than just your credit score when making lending decisions, that might mean that such people are more likely to qualify for this type of loan.
People who borrow installment loans might also be the same people who might turn to payday loans. However, installment loans are a step up from payday loans since they allow you to borrow more money, repay the loan over a longer period of time, and get lower interest rates.
Some people take out an installment loan because they are living paycheck-to-paycheck and desperately need the money for urgent expenses.
How Much Do Installment Loans Cost?
It’s important to note that not all installment loans are created equal—some are much more expensive than others. And many state laws – but not all of them – place a cap on the rates for installment loans. For example, for a $2,000 closed-end installment loan, 32 states and the District of Columbia cap APRs from 17% to 36%. Meanwhile, five states have no cap, with some allowing installment loans to charge as much as several hundred percent APR.
How much you’ll pay will depend on the loan company you borrow from. However, they do tend to be cheaper than payday loans, which the Consumer Financial Protection Bureau found carried an average APR of 400%.
Some installment loans have origination fees of anywhere from 1 percent to 6 percent. Others will charge prepayment fees of as much as 5 percent. Some fees are optional like insurance for your loan that will pay your loan in situations like if you lose your job, or get sick, or become disabled. Make sure to carefully read the loan agreement so that you know all the fees that will be charged on your loan.
What Are the Risks of Using an Installment Loan?
Because you’re borrowing money at a relatively high interest rate, the very first risk to consider is how difficult it might be to pay it back. Some people take out an installment loan because they are living paycheck-to-paycheck and desperately need the money for urgent expenses. But after they’re able to cover the expense, they still are struggling to make ends meet and then they also have this new loan payment.
That being said, know that installment loans are not a long-term financial solution and should only be used to meet short-term financial needs when you know you can afford repayment.
When people get behind on their installment loan payments. This can lead to all sorts of additional penalties and fees on the loan making the payments even more expensive.
In this case, the borrower could end up struggling to ever pay the loan back. The financial institution could then take the borrower to court in order to try to get a judgment against them in order to seize assets or garnish wages. If you’re unable to pay, you could have to go through bankruptcy.
In addition, not paying your installment loan will damage your credit since your missed payments will be reported to credit bureaus. That will further damage your credit and make it more difficult to rebuild your credit score.
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